Should You Buy System D Inc. (TSE:3804) For Its Upcoming Dividend?

System D Inc. (TSE:3804) stock is about to trade ex-dividend in 3 days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, System D investors that purchase the stock on or after the 29th of October will not receive the dividend, which will be paid on the 30th of January.

The company's next dividend payment will be JP¥11.00 per share, on the back of last year when the company paid a total of JP¥10.67 to shareholders. Looking at the last 12 months of distributions, System D has a trailing yield of approximately 2.4% on its current stock price of JP¥450.00. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. System D paid out a comfortable 31% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Luckily it paid out just 16% of its free cash flow last year.

It's positive to see that System D's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Check out our latest analysis for System D

Click here to see how much of its profit System D paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see System D earnings per share are up 2.9% per annum over the last five years. Earnings per share growth in recent times has not been a standout. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. System D has delivered 36% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Should investors buy System D for the upcoming dividend? Earnings per share growth has been growing somewhat, and System D is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and System D is halfway there. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while System D has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for System D and you should be aware of this before buying any shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.